Tuesday, February 4, 2014

Wynne Hedging Her Bets on New Pension?

For much of her first year in power, the premier campaigned to boost the Canada Pension Plan. Rebuffed by Ottawa, Wynne is now planning an Ontario pension plan of her own for the spring budget.

It will be a bold political rollout. She’d best not drop the ball.

To fully grasp the risk of a pension flip and political flop, it’s worth retracing the premier’s steps.

At two summits convened by Ontario, Wynne rallied her fellow premiers on pensions. Her treasurer, Charles Sousa, also forged an unprecedented consensus among the provinces late last year — until the federal Conservatives nixed it.

In the aftermath, Wynne — you know, the premier who jogs in those TV ads, talking breathlessly about solving tough challenges — restated her vow to carry the baton forward: Ontario would pursue its own public pension plan to supplement the CPP.

Give the premier and treasurer credit for placing our erratic retirement incomes back on the national agenda. The maximum CPP payment is a mere $12,000 a year — far below the needs of most middle class Canadians. Future generations can’t rely on private pensions (passé) or RRSPs (unused) in an era of precarious work, weak savings and corporate flame-outs.

But for all her public resolve, is Wynne wavering privately in the homestretch? After professing her fealty to CPP expansion, is she now flirting with second-best options?Government sources say the Liberals are still considering a way to mirror the CPP’s time-tested “Defined Benefit” model, with fixed (or targeted) payouts for all. It has long been Ontario’s first choice.But the premier also seems enamoured of a “Defined Contribution” plan based on the British “NEST” model that would allow Ontarians to “opt out.” As outlined in Sunday’s column, this NEST option is analogous to the retirement accounts many risk-averse corporations are switching to.

But these “defined contribution” plans are widely seen as glorified savings accounts because they make no promises or targets for future payouts. Plan members are vulnerable to the vicissitudes of the market when it comes time to lock their lifetime savings into an annuity — just like an RRSP.

For Wynne, the political appeal of a British-style NEST is that the opt-out provision serves as a political safety valve to disarm opponents. The premier knows that anti-tax populists will pounce on any pension proposals, trying to confuse the public with talk of payroll taxes or deductions that pick our pockets.

Wynne will counter, correctly, that pension premiums have nothing to do with a naked tax grab. They aren’t siphoned off to the government’s coffers for its own spending.

Politically, a voluntary NEST plan would be that much easier for Wynne to pitch than a conventional CPP-style pension. So, too, would other options, notably a variation on the PRPPs (Pooled Registered Pension Plans) pushed by Ottawa. PRPPs were resisted, until last year, by Ontario because they tend to have higher fees and erratic enrolment.

Quite apart from the inferior performance of a NEST or PRPP-style plan, Wynne would be closing the door to any future CPP enhancement. If there were a change in government federally, Ontario could not reverse itself so late in the game to give Ottawa a second chance.

Just listen to Keith Ambachtsheer, a pension expert on an advisory panel set up by Wynne: “You can’t just suddenly say two years from now, ‘Oh now there’s a change in government in Ottawa, now we’re going to do CPP enhancement’,” he told me. “You can’t switch tracks.”

Why would Wynne import an untested British NEST when the CPP’s homegrown nest egg has incubated so handsomely? Why is Sousa talking up Ottawa’s PRPPs, and possible hybrid models, when they are widely discredited?

And why isn’t Wynne broadening the conversation to close the consultation gap in her pension panel? It boasts an impressive blue chip membership, but lacks any voice from organized labour, which has long spearheaded the drive to enhance the CPP.

Wynne has a historic opportunity to bequeath an Ontario Pension Plan as her lasting legacy. As any pension fund manager (or marathoner) would tell our jogger-premier, short term calculations don’t pay off in the long run.

Sometimes you have to run uphill.

I am amazed at what is going on in Ontario but hope the new Technical Advisory Group advising Premier Wynne will knock some sense into her and Minister of Finance, Charles Sousa.

Let me not mince my words here. There is no other option for Ontario but to mirror the CPP model and create a defined-benefit pension plan that has the same stringent governance as the CPPIB. Any other option, including a hybrid plan or "NEST" plan, is simply unacceptable. If this is the route Ontario is proposing, then they're better off not doing anything at all.

Second, they need to bring in Jean-Pierre Laporte, a pension lawyer who first came out with the idea on a supplemental CPP a decade ago, and provided some technical advice. Jean-Pierre is now working at Integris Pension Management Corp., the firm he founded with three other shareholders, including Gavin Graham, the former director of investments at BMO Asset Management. (read my comment, No Pension, No Problem?).

Third, they should of named me to handle the governance of the new defined-benefit plan. I'd set up the tightest governance rules, incorporating best standards from across the world. I would make sure compensation isn't excessive or based on bogus benchmarks. In fact, my governance standards would be so good, I'd guarantee you they would raise the eyebrows of Gordon Fyfe, Michael Sabia, Leo de Bever, MarkWiseman, and even Ron Mock. I would make them all cringe and work much harder to earn their Lotto 6/49 type compensation (in fact, I would probably recommend to do away with excessive bonuses and just pay them well for their job, which is how most hard working Canadians get paid. Our public pension plutocrats are overpaid! What else? I would make sure they take diversity in the workplace very seriously, producing an annual report on how they promote diversity at all levels of the organization).

Fourth, John Staric a pension professional and expert in the feld, sent me these excellent comments after reading this comment:

I thought I would give you a little something to contemplate, the Ontario government has assembled a technical advisory group to advise the government on how to strengthen retirement income security for people across the province as you have been following.

The Technical Advisory Group on Retirement Security is made up of pensions experts from the public, private, and non-profit sectors or so they say. Let us take a look.

1. Bill Morneau, executive chairman of Morneau Shepell;
2. Keith Ambachtsheer, director of the Rotman International Centre for Pension Management;
3. David Denison, a former president and chief executive officer of the Canada Pension Plan Investment Board;
4. Susan Eng, vice-president for advocacy at CARP;
5. Melissa Kennedy, leader of the general counsel's office at the Ontario Teachers’ Pension Plan; and
6. Jim Keohane, president and CEO of HOOPP.
7. Alongside former Prime Minister Paul Martin, this group will advise the government on how to improve the retirement income system, including an Ontario-based alternative to a Canada Pension Plan enhancement.

Essentially they have no private plan sponsor or pension expert that actually works with or knows what the average retiree goes through.

When I worked at Fairmont Hotels and the Canadian Red Cross I would see pensions of 3 to 5 thousand a year coming from a DB plan. My point here being, these guys are too high up and too distant from the problem to actually address it.

But let me get back to Ontario's new pension plan. Again, if it's not a defined-benefit plan, I say don't bother because it will be a monumental failure. I hate NEST, PRPPs, hybrid plans, or anything which allows people to "opt out" of their pension plan (unless it was for health related reasons). Force Canadians to save for retirement, especially the middle class (there is an argument to be made that the poor are better off without enhanced CPP).

Of course, all this discussion of Ontario hedging its pension bet wouldn't be necessary if Harper and Flaherty did the right thing for the country and finally enhanced the CPP for all Canadians. Unfortunately, they've been bought off by the financial services industry that foolishly touts PRPPs.

Hey, it could have been far worse. Just look at President Obama's 'MyRA' nest egg. That will be an even bigger policy blunder than Obamacare and the way it was rolled out. The problem with politicians is they try to assuage too many competing political interests at once and end up doing more harm than good when it comes to introducing sensible policies. Premier Wynne, be careful, you don't want to go down Obama's path.

Below, Keith Ambachtsheer, Director, Rotman International Centre for Pension Management, and one of the technical advisors for this new Ontario plan, discusses transforming pension funds into effective asset owners. I also embedded an interview where Keith and Rob Carrick discuss possible solutions for fixing Canada's retirement system.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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